Ex-arbitrage genius unveils corruption, evil on Wall Street

Published September 23, 2012 - 4:00am Last Updated September 23, 2012 - 5:52am

Average: 4.4(26 votes)

The lonely redemption of a financial critic

Katie Marks attends a demonstration on the one-year anniversary of the Occupy Wall Street movement on in Seattle. Similar events took place in urban financial districts across the United States. (ERIKA SCHULTZ / AP)

ESSEX, N.Y. — STRIDING BAREFOOT through the fields of his farm in the Adirondacks, S.B. Lewis, known as Sandy, is talking without pause, gesturing this way and that in a soft summer rain.

That Lewis is in a rage is not unusual. A few days earlier, he had watched as the computerized stock trading of Knight Capital ran amok.

“If Knight blows, six firms follow, and the whole corrupt thing goes up,” he said. “Predator banks and hedge funds run the market for their pleasure — there’s no rational structure, nothing!”

He is just warming up. News reports have revealed a world he knows intimately. Goldman Sachs pays vast fines to avoid prosecution for mortgage securities fraud. Barclays manipulates interest rates. The Senate exposes HSBC as a racketeering enterprise, laundering money for drug cartels. Banks are laden with bad assets.

And Wall Street, Washington, the press corps, everyone sits and stares like so many dumb cows.

The temptation is to dismiss Lewis, 73, as a crank, except he once ruled as an eccentric genius of arbitrage, with a preternatural feel for the tectonic movements of the markets. He has railed for decades about venalities now on daily display. Rude truth is his currency.

He knows Wall Street’s heights. He helped hire Michael R. Bloomberg, and he invested the money of two former Securities and Exchange Commission chairmen, making a fortune in the 1980s. And he knows its depths, since he pleaded guilty to stock manipulation in 1989 and was barred from the Street.

President Bill Clinton pardoned him, and a federal court judge later said Lewis acted out of pure reforming impulse.

But he remains in self-imposed exile.

Lewis wants to flip over Wall Street’s paving stones and search for worms.

He relies on his singular strength: he discerns patterns where most see random data. He forecast the financial meltdown of 2008 that vaporized Bear Stearns, Merrill Lynch and Lehman Brothers. In 2006, he warned a Bear Stearns executive: “Bear is toast. Get out now!”

As for the whirling, 3-million-shares-per-second casino of Wall Street? He sees it as rigged. “I would not risk stocks under any circumstances,” he said, “because we don’t know when this thing is going to blow.”

Nothing about Lewis is easy. He delights in sending scabrous, insulting, free-associative mass emails to journalists, financiers and members of Congress. Show annoyance, and he doubles down.

“You know what I do with tension?” he said. “I ratchet it up!”

Not surprisingly, some dismiss him as a nut. As striking are those who pay careful heed.

“Sandy’s right; government created a banking oligopoly with no accountability,” said Peter Solomon, a friend of Lewis’ who runs an investment banking firm.

Arthur Aeder, a retired accounting executive, was twice fired by Lewis. “Not many antagonize Goldman just for the hell of it,” Aeder said. “Most people think, `I have a family to feed.“’

Lewis is no less harsh on himself. After a visit, he handed two reporters laptops containing every furious email he had sent and received over 10 years.

“The Wall Street ethic broke decades ago,” he said by way of goodbye. “The stink is terrible.”

Lewis was born to Wall Street royalty — his father, Cy, was managing partner at Bear Stearns from 1949 to 1978.

His parents were characters out of a Fitzgerald novel: his father was Jewish, debonair and domineering; he desired power, wealth and a beautiful woman — wife or mistress, that mattered little. His mother, Diana Bonnor, a member of the Protestant establishment, was beautiful, brilliant and no less formidable. She cared about social justice and status and was profoundly uninterested in mothering. “I never remember her at breakfast,” recalled Roger Lewis, Sandy Lewis’ younger brother.

“High tea? Oh, yes. Cocktails? Yes! But breakfast? Never.”

Cy doted on Sandy while Diana screamed at the boy, striking him with a hair brush when he refused to read, he said. A willful child, the boy stopped speaking for days and sometimes retreated onto a window ledge, sitting high above Park Avenue.

Another brother, John, renounced wealth, bought clothes in thrift shops and became a well-known legal-aid lawyer. Roger got off to a fine start on Wall Street until the Grateful Dead moved into his town house before Woodstock. He ingested gobs of LSD, was arrested on charges of selling drugs and served time.

When Sandy Lewis was 10, his parents shipped him off to Chicago and Bruno Bettelheim’s Orthogenic School, an institution for emotionally disturbed children. The first day, he held his breath until he nearly passed out. But he credits the school with saving his life; Bettelheim became a second father.

“He had Bruno’s traits: he was arrogant, controlling, all powerful — and generous,” recalled Charles Kaiser, a former teacher at the school.

Lewis saw in Wall Street a three-dimensional chess game played at great velocity. “Brain not brawn, and the smartest wins, yes!” he said.

He came to conceive of the Street as a drainage system, every pipe connected to another. Inside information sluiced from brokerages to white-shoe law firms to investment houses.

He glimpsed this world when he returned to New York in 1964. He said he sat in the front of his father’s Cadillac limousine, listening as Cy and friends talked angrily about a partner who had impersonated a reporter for The New York Times and got a half-hour drop on a Supreme Court decision. The firm profited by trading ahead of the news.

Lewis said he confronted his father that night. Dad, you must fire that man. Cy shook his head: He is too valuable, Son.

“That,” Lewis said recently, “was when I realized that the trouble on Wall Street was systemic.”

He refused to sit at the Four Seasons trolling for inside tips and paying for call girls for clients.

He was fired by all the best firms: Salomon Brothers, White Weld, Dean Witter and Merrill Lynch. At Merrill, the chief executive officer at the time, Donald Regan, pursued a system to buy and sell stocks without using the exchange floor. Lewis came to see this creation as unfair to the public.

So Lewis, in speeches and work with the SEC, fought to make all sales transparent on the floor of the exchange. “In one of my periodic periods of unemployment, I walked down the street thinking, `OK, now I’m going to sabotage Don Regan,“’ he said.

“I have six kids and I’m going to be eating worms.”

He worked briefly for Ivan F. Boesky, until he realized the arbitrage specialist was trolling for inside information. Lewis quit and Boesky was later imprisoned.

To find a place that would not fire him, in 1980 Lewis established S.B. Lewis and Co. The company’s returns were meteoric — over 50 per cent annual returns after expenses. Former employees recall a brilliant arbitrageur who could, without warning, go to “Sandy World,” a mental planetoid with a population of one.

Lewis brokered the merger between Sandy Weill’s Shearson and James Robinson’s American Express.

He had found success, a lovely wife and five boys and a girl, with a home in Short Hills, N.J. Except his volcanic pit never stopped rumbling.

In November 1988, Rudolph W. Giuliani, the U.S. attorney, indicted Lewis on 22 charges, accusing him of manipulating the stock of a large insurer. Giuliani was a Savonarola in the canyons of mammon, and Lewis would fall beneath his sword.

Rivals shared laughs at Sandy the Moralist laid low.

The trouble, however, took root not in venality but in his mania to police his industry. He had watched as insiders reaped profits by driving down prices before shares went public.

He laid a trap. He asked another securities firm to buy stock in the insurer to shore up the price. I’ll cover your losses and describe the payments as “investment banking services,” he told them.

Lewis hoped to deliver a delicious kick to the teeth of the insiders. He made not a dime; his firm was not involved in the offering.

Years later, a federal judge, William C. Conner, described Lewis’ action as “an act of market vigilantism in which Lewis in no way personally profited.” He was infuriated, the judge wrote, “by what he viewed as the unethical actions of arbitrageurs.”

“He was the Lone Ranger,” Solomon recalled, “and Giuliani treated him like a member of the corrupt club.”

Prosecutors threatened Lewis with 15 years if he went to trial. His wife, Barbara, urged him to cut a deal. He argued prison would be interesting. His bravado reinforced her fears.

Silver haired and trim, she looks at Sandy Lewis, still consumed: “I thought he would die. That was weak of me.”

He pleaded guilty to three charges, and the judge handed him three years’ probation and a $250,000 fine.

Tell us about Bill Clinton. Lewis cannot resist a smile; even by his standards, this is a weird tale.

In the summer of 1994, Lewis — in exile — got a phone call at his Maine home from his friend, Douglas S. Eakeley. Eakeley was also an old friend of Clinton’s.

I want you to go to a fundraiser in Portland, Eakeley said, and talk with the president about his womanizing.

Is this, Lewis asked, an intervention?

As it happens, Lewis possesses a sixth sense for psychic pain. He can pick the addicted, the sick and the depressed out of a crowd. His fractured childhood and pathological candor give him an expert hand with the singed.

He rounded up Barbara and a friend, Dr. Stanley Evans, and drove to see Clinton at the Holiday Inn by the Bay.

Lewis introduced himself. “You’re Doug’s friend?” the president said, according to Lewis and Evans.

“Wait, we’ll talk.”

The Secret Service escorted Lewis, his wife and the doctor into the kitchen, and the president followed.

“Sir,” Lewis recalled saying as he stared at Clinton. “Doug thought maybe I should spend a weekend with you. It would be the two of us only.”

Lewis said the president was taken aback. “What is this about?”

“Sir,” Lewis said, “this is about your most personal business. You probably won’t be too happy with me by Monday morning, but I think we can avoid a train wreck.”

The president’s face flushed. Evans realized his friend was confronting the president about his extramarital affairs. “I thought Sandy had lost his mind,” he said.

The weekend session never took place. Revelations of the president’s sexual dalliance with Monica Lewinsky came years later.

Clinton’s office declined to comment.

Eakeley said Lewis might be better for his exile. One of Lewis’ sons, John, is not convinced. He sees a father become “walking id.”

“Giuliani,” he said, “obliterated some part of him.”

In 2000, Eakeley and former Attorney General Nicholas deB. Katzenbach worked pro bono and submitted a pardon application to Clinton.

In January 2001, just before leaving office, the president signed it.

Six years later, Conner overturned the SEC order that barred Lewis from Wall Street. “Federal regulations now outlaw the very practice his actions were meant to thwart,” the judge noted.

No cloud of mellow descended. Lewis trailed the SEC counsel out of the courthouse.

“I will rip your guts out,” he bellowed. “Letter to follow!”

A few days later, he looked at the mountains and experienced an epiphany: “I’ve gotten my redemption, and no one cares.”

To comment or view comments on this article, please LOGIN or SUBSCRIBE